Fractal Footwork

This was a research paper written for my capstone in Economics, and remains the only paper I've ever been proud of. It might be a little thick, but I thought I'd post it seeing its pertinence.

Introduction

Automotive manufacturers sometimes choose to introduce a halo car, a car that signifies the pinnacle of its current technology. However, automotive manufacturers often choose to either abandon their halo model or not to develop one entirely, particularly in light of their concern for the halo car's relevance in the brand's overall market. The potential effects of a halo car in providing more efficient capital investment and in modifying the consumption of lesser models, through both brand perception and trickle-down engineering, to determine how they affect developing firms' market share within an oligopolistic automotive market will be argued here by measuring those firms' market share in relation to their exploitation of halo models.

Literature Review

Four research articles are relevant as respective associations to my research topic; one defines a "brand halo" on the used car market, another shows brand-image associations in the automotive market, the third notes preference signaling of consumer choice in the environmentally friendly automotive market, and the last measures sequential capital investment in the competitive environment of a farm.

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In "The 'Brand Halo' Effect: Brand Reliability Influence on Used Car Prices," Betts and Taran (2002) discuss the effects of a brand halo on the used car market, finding a positive correlation between brand reliability and the price of a subset vehicle of that brand. The researchers regression supported their hypotheses that "wheelbase, engine size, price of a new model moderated by age, reliability, reliability moderated by age, and brand reliability are each significantly related to the used car price," using brand reliability as the brand halo variable and the other six as controls (22). They also found a correlation between reliability and brand reliability, suggesting that the effect of brand reliability on the price of a used car "was beyond the effect of the specific reliability of the individual model of used car" (22). This research is important to the topic because it shows the "halo effect" taking place and changing the consumption of certain vehicles in the used car market relative to what the car's actual reliability would have done to determine its level of consumption; this suggests that consumers are paying more for a falsely perceived idea of reliability (22). I plan to focus my research around halo effects other than reliability, but Betts and Taran's research suggests that consumers do take into consideration the perception of the brand as a whole when consuming automobiles in the competitive environment of the used car market.

In "Estimating the Value of Brand-Image Associations: The Role of General and Specific Brand Image," Sonnier and Ainslie (2011) attempt to "demonstrate the substantial value of specific brand-image associations" (519). Sonnier and Ainslie note the two brand differences in automotive models, one for the parent company and another for the model name, used to separate brand imagery between the two names; the parent brand is encompassing and the model name sounds out the attributes of that model (520). The researchers compare the "willingness to pay" for a "two-factor model" of excitement and dependability and find a negative correlation for certain models, and no correlation for others (519, 525). The research points out the separation of brand-imagery between two axes of data, and this is important because it exemplifies the fact that a consumer is willing to sacrifice one factor for another; this may be hampering to my results if I choose to regress solely one 'halo' factor, such as performance, and disregard another, such as environmental promotion. One brand may produce a new 'halo' performance car, but the sales data for the rest of the brand's range may not move due to a shift in consumer preference toward another factor.

Sexton and Sexton (2012) in "Conspicuous Conservation: The Prius Halo and Willingness to Pay for Environmental Bona Fides" note the Toyota Prius's involvement in "conspicuous conservation," a consumer's desire to "undertake costly actions in order to signal their preferences for the environment" (Sexton 2). The researchers "test empirically for the presence of a conspicuous conservation eﬀect in vehicle purchase decisions" in communities that hold an environmentally friendly ethos, determining green communities as those who vote Democratic (3). They also note a "green halo," the willingness to pay for an obviously green car over a covertly green car, proposing "green signaling [as] an alternative" to "conventional altruism" before testing it with empirical data (6, 10). The difference between overt, obvious halo models and covert models is the immediacy in recognition of a car's qualities; for example, the Toyota Prius has recognizable and individual bodywork and is therefore overt, whereas the Toyota Camry Hybrid has bodywork that looks like any other Toyota Camry with a standard gasoline powertrain. If people are willing to pay for an image of a hybrid vehicle over the actual carbon emissions saved, then consumption is aided by brand image in certain markets and a halo effect of that brand image may be able to steer consumer behavior. The researchers then found "that Prius is likely being substituted in place of the Civic Hybrid and Camry Hybrid" due to their absence of a "unique design" and "the value of the green halo signaled uniquely by the Prius" (15). Because the Toyota Prius, and other current green halo models, are closer in price to the manufacturer's base models than performance models, something besides the halo's advertisement of the brand may have to influence a consumer's decision to purchase a lesser model.

Where Betts and Taran (2002) and Sonnier and Ainslie (2011) both enter their studies with obvious distinction for the brand and the subset brand of vehicles, Sexton and Sexton (2012) begin their research with the thought that less obvious hybrid vehicles will be consumed normally in green communities, only to later gather that the covert hybrid vehicles under the same brand as the overt hybrid vehicle are sold to a lesser degree in green communities. Betts and Taran (2002) measure their data in the competitive environment of the used car market, which should make their empirical statistics more accurate in testing their hypotheses, but Sexton and Sexton (2012) measure their data in the new car market where supply side constraints could limit companies from producing to the same degree as another, potentially yielding their data inconclusive.

Of the three articles cited, one that defines a "brand halo" on the used car market, another that shows brand-image associations in the automotive market, and a third that notes preference signaling of consumer choice in the environmentally friendly automotive market, the latter two will help direct my theoretical analysis while the former two will provide a basis for testing my hypothesis that halo cars change consumption of lesser models.

Theory

The potential for a firm's increase in demand due to the introduction of a halo model lies with the halo model's potential to change that firm's brand perception through a "brand halo" (Betts 20). When a "brand halo" exists, a consumer evaluates "a good based on the level of some attribute generally associated with the brand," disregarding in part "the actual level of the attribute present in the specific model being evaluated" (20). If a halo model is introduced into the market, is able to change brand perception, and all other variables are held constant, then a shift in demand should follow that change in brand perception.

In an Oligopoly market, where only a limited number of firms sell products, larger firms usually have the power to control the output of smaller firms based on how the larger firms set their own output. In this type of market, an individual firm's best chance to increase profit is to steal market share away from another competing firm; a way to accomplish this without having to respond to another firm's direct price and output would be to increase demand through advertising or decrease marginal cost and have the other firms respond to your strategy. A decrease in marginal cost can lower the price of a product, an increase in demand can increase the price, and a combination could do either; however, both changes can increase quantity. In both cases, consumer surplus increases, the area under the demand curve minus the area under the price curve, and producer surplus increases, the area under the price curve minus the area under the marginal cost curve. The consumer surplus measures the cumulative benefit the consumers who purchased a product gain from buying that product, and the producer surplus measures the benefit the producer gains from selling; these are important to show as a result of a halo car's induction because they display how much benefit is added on both sides without physically changing a base automobile.

The learning curve illustrates that "costs fall with cumulative output" in "a wide range of industries, and management consultants have stressed the importance of learning for production planning" (Majd 331). Because "firms face considerable uncertainty about future demand," risk rises when implementing the learning curve on one factor, as it may turn out not to reflect future demand (Majd 332). For these reasons, it may be more effective for automotive firms to test future development on the smaller market of a halo model. By initially investing in capital to produce a halo model, firms are able to both accumulate physical, human, and reputational capital and gauge how effective that capital is without overinvesting in inefficient capital when the firm refreshes the base models. For example, if a firm predicts that the future consumer may demand an electric drivetrain from a base model, the firm can first purchase and test equipment used to make the electric power units on a halo model and then purchase more capital if demand for electric drivetrains increases in the average model. This way, the firm's knowledge of building electric cars along with their expertise in purchasing efficient equipment reduces the total cost in the second period compared to if the firm did not produce a halo model in the first period.

Much in the same way that an advertisement might change a firm's perceived quality, a halo car may also have the power to modify consumer behavior, but a halo car's potential to change demand for a firm's range of cars may vary based upon how the halo model is presented to the consumer. According to Settle and Golden's (1974) take on Attribution Theory, "If the message is attributed to the advertiser's desire to sell, the consumer would be uncertain about the actual characteristics of the brand and the probability of her purchasing it would be expected to decrease," while "An attribution to the actual characteristics . . . would be expected to lead to a higher certainty and a higher probability of purchase of the brand" (Settle 181). In other words, the probability that a consumer would purchase a base automotive model prior to learning about that brand's halo model hinges on the consumer's perception of shared qualities between the halo model and the base model and the absence of the halo model's perceived existence as purely an advertisement for the brand (Settle & Golden). A halo model may also benefit from exclusivity over that of a celebrity endorsement. Where a celebrity could be offered an exclusivity agreement they may not be willing to sign, who's "nondistinctiveness [by endorsing multiple brands] may result in consumers' inferring that the nature of the spokesperson was the reason for the endorsement, not the nature of the product", a halo model's exclusive design is in the hands of the brand (Tripp 536).

Empirical Analysis

While there are more than a handful of candidate brand halos acting on an automotive manufacturer, I will specifically be measuring two, as they are highly apparent and therefore more easily measurable. The two candidate halo models used will be considered a halo over the brand if it is an original model and it exemplifies a pinnacle of performance or environmental status far beyond that of the brand's current offerings. The halo models will be broken down into two categories, green and performance, where green models will overtly display environmental conservation and performance models will overtly display a pinnacle of speed. The market share data comes from WardsAuto.com and spans the time period from 1961 to 2013 for brands selling within the United States.

I use a time-series regression model with lagged dependent variables to analyze the effect of a halo model on market share. The lag of the time period exists to see if a halo model has a lasting effect on market share after the halo model has finished production. The lag will extend back 6 years. An automaker's market share, denoted as MS, is the dependent variable, while the independent variables for this model are the existence of an environmentally conscious halo model, denoted as GreenHalo, the existence of a performance halo model, denoted as SpeedHalo, and the number of firms in the market selling more than .01 percent of vehicles, denoted as Firms. The existence of a halo model will be run as a dummy variable with values of only 1, if the halo car exists, or 0, if the halo car does not exist. The time-series regression model will be run as follows.

The hypothesis I will be examining will measure if an automotive manufacturer’s market share changes depending on whether or not that manufacturer is producing a halo model. The empirical model also takes into consideration how a halo model may affect a change in market share over time, even after the halo model is no longer in production, to check for a possible decay on market share.

The standard hypothesis states that the existence of a halo model is not able to explain a change in a manufacturer’s market share.

H0: βn , λn = 0

The alternative hypothesis states that the existence of a halo car may explain a positive change in a manufacturer’s market share. I also expect the effect to converge to 0 the greater the lag, the time since the halo model finished production.

Ha: βn , λn > 0

After running the regression model, as seen on Table 1, with both the green halo and performance halo models as independent variables with a lag of 6, as that was the maximum the program would allow, the performance halo model seems to have an immediate effect on market share and then diminish with time. However, the confidence of that effect immediately decreased with the lag, the green halo model looked more sporadic than the performance model, and the last lag was much higher than I expected on both the performance and the green models, so I ran a second set of regressions with a greater lag and with the performance and green halo models separated.

Table 1

The second set of regressions, as seen on Table 2 for green halo models and Table 3 for performance halo models, continued to produce sporadic coefficients for green halo models and a low confidence level for both performance and green halo models’ effect on market share. However, the final lag seemed to spread its effect over the newly added preceding lag variables. The data proves to be relatively inconclusive for both green halo models and performance halo models affecting market share, but does reflect positively on performance models’ effect as the coefficient for the performance halo is positive with a p-value less than .05.

Table 2

Table 3

I hypothesized that the halo model would have the biggest effect in the time of measurement and decrease thereafter; this does not turn out to be accurate for either halo model from what the regressions have shown, and may be a result of the decrease in marginal cost more than a change in demand. The green halo models’ existence does not seem to show any concrete positive or negative correlation with market share. However, the performance halo models do show a positive correlation with market share in the current time period, but does not show any significant correlation thereafter; this could be explained as an even distribution of exposure of the halo model to the consumer over a number of years, or a linear build up of reputation.

These results fall in line with most of the previous research, when considering performance halo models. Although, when recalling green halo models, these results measured the entire United States market while Sexton & Sexton’s (2012) research factored out environmentally supportive Democratic buyers from Republican buyers that showed a “disproportionate increase in Prius market in green communities” (15). Where “conspicuous conservation” is apparent for democratic buyers to signal their approval of environmental conservation, the opposite could also be true for republican buyers trying to signal their disinterest in environmental vehicles, potentially explaining the difference in our results (Sexton & Sexton).

Conclusion

In quest to increase market share, some halo cars may have the potential to change demand as a form of advertising and change total cost through more efficient capital investment in an oligopoly market. These empirical results suggest that a performance halo model is more able to increase market share than environmentally conscious halo cars in a region of evenly mixed demand. These results suggest that firms do not currently have an incentive to produce environmentally conscious halo cars in a politically even region in an attempt to increase overall market share, but may have the incentive to produce overt green cars to steal sales away from covert green cars, which is consistent with Sexton & Sexton’s (2012) research.

If a government wishes to protect the environment for paternal reasons and a country’s indifference toward environmentally conservative cars by its citizens exists, then that government may have to enact regulations to produce the desired result. However, countries like the United States have already enacted these sorts of environmentally protective standards, “which mandate an average fuel [consumption] of 54.5 miles per gallon for the 2025 model year,” on automotive models, and these established laws affecting all cars may currently be influencing consumers’ indifference toward overtly green halo cars (Vlasic).

This research could be expanded to measure not just a performance or green halo model’s effects, but to measure consumers’ level of a certain characteristic on a brand and how that affects the price of a series of models. For instance, before 2014, BMW had not produced an original performance halo model since the 1980s, but they do produce performance-modified versions of their regular models; this could potentially create a performance brand halo for BMW that should be measured. Other questions related to this topic that deserve attention include how other firms respond to the introduction of a halo model by a competing firm, how market entrants are affected by introducing a halo car, how a halo model affects the elasticity of demand for regular models, how smaller niche supercar companies owned by larger firms affect the larger firms’ change in demand and total cost, and how a combination of two or more halo characteristics in a halo model affect market share.

The effects of a “brand halo,” as noted by Betts & Taran (2002), have the ability to modify an equilibrium of a base product though changes in how the consumer perceives the brand selling that base product. These changes have forced some large firms to produce halo cars in certain periods but not in others, and understanding and being able to predict why may allow other firms to lead or react to another firm introducing a halo car, adding even more depth to simple output and price changes.